Friday, October 19, 2012

From anti-austerity protests in Europe to the US presidential campaign, you don't have to look too far for proof that a weak economy tops most people's concerns. The uncertainties holding back growth are widespread, but we think they can be condensed to three questions: whether the latest policies in Europe will help to save the euro; whether lawmakers can steer the US economy away from the "fiscal cliff" that looms in early 2013; and whether China's response to its economic slowdown will succeed. On all three fronts, my team of analysts and I think moderately favourable outcomes are likely. Our latest global outlook explains why economic conditions should improve a bit next year, and why we have raised our forecast for US growth.

I am a lot less optimistic for these reasons:

the woes of the EU essentially concern micro issues (notably labour markets and regulatory reform). Macro fiddling will not address those but do involve screwing the bondholders and investors needed to fund reform and transition;

it is tempting to reach the same conclusion regarding the U.S. The case their highlights the dominance of distributional concerns over production concerns. It may be beyond the polity to draw back from distribution driven politics.

China is on the road to equilibrium which includes less risk and lower returns. Double digit growth is not on that agenda. That is not a problem but the west cannot expect China (or India) to provide infinite demand at prices the west loves.

I trust the difference between these views is one of timing not fundamentals.

Monday, October 8, 2012

“Dr Norman (Greens Co Leader) said the Reserve Bank should print an extra $2 billion and buy Government earthquake bonds and replenish the Natural Disaster Fund by providing money for the fund to invest in overseas assets.

He said that would help reduce the need for overseas borrowing and send a signal to the market that New Zealand is prepared to act to protect its currency.”

Saturday, October 6, 2012

Amongst the several factors which render monetary policy impotent as a means for manipulating the economy through centralised playing with the levers, the forces which drove the RB of Australia to drop interest rates remind us of yet another.

When global times are tough and almost all central banks drop interest rates, a country which holds its rates suddenly finds itself running – through no choice of its own other than the choice not to follow suite – a tight monetary policy.

This is precisely where Australia and New Zealand find themselves, whether they like it or not, as other monetary authorities slide down through zero into quantitative easing.

While it is true in a technical sense that the decision to retain present settings is indeed a policy stance, the resulting relative position is one at least partially “forced” by external circumstances.

Central banks then are not masters of their own destiny regardless of their governance arrangements.